Housing Crisis Was Created by a Perfect Storm of Greed and Goals

Who's to blame for the collapse of the U.S. housing market? That question is at the root of the hearings being held by the Financial Crisis inquiry Commission, a bipartisan commission of former political officials. Republicans want to blame Fannie and Freddie for their risky loan practices, or federal officials for their lofty housing goals. The favored target of Democrats is Wall Street and predatory lenders.

The reality of the situation is that all three forces are to blame. The cast of characters and motivations reads like "The Bonfire of the Vanities": execs at Fannie Mae and Freddie Mac were worried about corporate profits; the government wanted to expand home ownership to low income families; and Wall Street and lenders were just looking to make an easy buck. All got what they wanted -- creating the perfect storm that ultimately led to the collapse of the U.S. housing marketplace.

So, it's doubtful the commission will be able to pinpoint a single culprit or the root cause of the problem. But that's not to say that the hearings aren't fleshing out some interesting plot lines.What's the excuse of Fannie and Freddie's top execs for getting caught up in the storm? Freddie and Fannie were losing business to Wall Street firms and they needed to find a way to provide similar "competitive returns" to satisfy their shareholders and raise new capital on the global marketplace.

Daniel Mudd, president of Fannie between 2005 and 2008 summed it up in his testimony, saying that competition from private label mortgage securities "posed a financial threat to the company because there was less business going into our market." He added, "it posed a mission threat, because many of the products financed by [private lenders] had affordability features that threatened our ability to meet our housing goals, and it threatened our customers, who didn't want to do business with us."

Robert Levin, former executive vice president and chief business officer for Fannie Mae, explained the decision-making process in his testimony by posing this question: "Would it be best to be able to deliver competitive returns to shareholders, stay relevant to customers and meet our mission requirements by doing nothing new, or by increasing our participation in these markets to some degree?" The primary market he was referring to was the Alt A market -- you know, the alternative documentation loans that eventually become known as "liar loans" because borrowers didn't have to prove income.

Panel member Douglas Holtz-Eakin questioned the lack of risk management at the two companies saying, "My interest is internal risk-management procedures at Fannie Mae, which ultimately failed and left taxpayers with the single largest bill we will face in this episode." Taxpayers are on the hook for about $126 billion, thanks to Fannie's and Freddie's risk-taking behavior.

Fannie and Freddie regulator Armando Falcon believes the companies were "not the unwitting victims of an economic down cycle or flawed products and servicers of their's." He believes their failure was "deeply rooted in a culture of arrogance and greed." But regulator James Lockhart also thinks "high affordable-housing goals and the resulting political pressure, compounded by [Fannie and Freddie's] drive for market share and short-term profitability, were major reasons why they lowered their underwriting standards." The goal of having 55 percent of Fannie and Freddie's mortgages granted to borrowers below the median-income was "mathematically difficult and a mistake," he said.

Once again, everybody is pointing fingers at everybody else, and likely no one will take responsibility for their actions. The only thing we'll probably ever know for sure is that the taxpayers will foot the bill for corporate greed and governmental mistakes in judgment.

Lita Epstein has written more than 25 books including The 250 Questions Everyone Should Ask About Buying Foreclosures and The Complete Idiot's Guide to Personal Bankruptcy.